33312110 a Project on Commodity Trading

7/31/2019 33312110 a Project on Commodity Trading

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2 Analysis of commodity indices in the global shipping trade

y Agricultural contracts trading grew by 32% in 2007, energy 29% and

industrial metals by 30%.

y Precious metals trading grew by 3%, with higher volume in New York being

partially offset by declining volume in Tokyo.

y OTC trading accounts for the majority of trading in gold and silver.

LIST OF TRADED COMMODITY

y Agricultural (Grains, and Food and Fiber)

y Livestock & Meat

y Energy

y Precious metals

y Industrial metals

Agricultural ProductsCorn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal, Soybean Oil,

Wheat, Cocoa, Coffee C, Cotton No.2, Sugar No.11, Sugar No.14.

Livestock and meatLean Hogs, Frozen Pork Bellies, Live Cattle, Feeder Cattle.

Energy

WTI Crude Oil, Brent Crude, Ethanol, Natural Gas,

Heating Oil, Gulf Coast

Gasoline, RBOB Gasoline, Propane, Uranium.


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Precious Metal

Gold,Platinum, Palladium, Silver.

Industrial Metals

Copper, Lead, Zinc, Tin, Aluminum, aluminum alloy, Nickel, aluminum

alloy, Recycled steel.

COMMODITY EXCHANGES

y Abuja Securities and Commodities Exchange

y Bhatinda Om & Oil Exchange Bathinda

y BrazilianMercantile and Futures Exchange

y Chicago Board ofTrade

y ChicagoMercantile Exchange

y Commodity Exchange Bratislava, JSC

y Dalian Commodity Exchange

y DubaiMercantile Exchange

y Intercontinental Exchange

y Minneapolis Grain Exchange

y Multi Commodity Exchange

y National Commodity and Derivatives Exchange

y National Multi-Commodity Exchange of India Ltd

y New YorkMercantile Exchange

y New York Board ofTrade

y LondonMetal Exchange

y Winnipeg Commodity Exchange


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RECENT TRENDS IN COMMODITYMARKET

y The 2008 global boom in commodity prices for everything from coal to

corn was fueled by heated demand from the likes of China and India.

y Speculation in forward markets.

y Farmers are expected to face a sharp drop in crop prices as a result of bad

rainfall.

y Other commodities, such as steel, are also expected to fall due to lower

demand.

Basics of Futures TradingPerhaps the biggest advantage to trading futures contracts is the leverage provided

by the exchange. However, controlling large contracts with relatively low amounts

of capital can create high levels of volatility. As a result, many traders will argue

that leverage is actually a disadvantage. Regardless of your opinion on leverage

and margin requirements, it is important that you fully understand the concepts.

Before a customer can establish a position he is required to make a minimum

good faith deposit, or margin, to assure the performance of his obligations. A

margin deposit is, in essence, a performance bond, which is usually between 5%

and 10% of the underlying contract value. A good faith deposit indicates the buyer

or sellers willingness and capability to compensate the opposite party to a

transaction


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Because margin requirements are low, hedgers are given the ability to lock in

pricing of cash market goods without tying up a lot of capital. It would be

counterproductive for a hedger who handles large quantities to put up 100% of the

value of the hedged commodity. The exchange grants margin discounts to those

that are deemed to be bonefied hedgers, due to the fact that the underlying cashposition is seen as collateral to secure the capital risked in the futures market.

Low margins make speculation in the futures markets very attractive, without the

advantage of leverage the rate of return on most commodities would be marginal.

The exchanges are responsible for setting margin requirements, but brokerage

firms have discretion to require higher deposits. Generally, the initial margin is

sufficient to cover the maximum daily price fluctuations. It is not uncommon for

margin requirements to fluctuate with the volatility of the market. A maintenance

level is established below the initial margin, usually 75% of the initial

margin. Once a trader's good faith deposit falls below this threshold additional

funds must be deposited or positions must be liquidated. This is known as a margin

call.

Orders

There are several types of orders that can be placed. In order to maximize

efficiency and profitability, traders must be comfortable in executing each of the

following options.

Market Order: The purpose of a market order is to execute a trade immediately atthe best possible price. Such orders give traders the ability to enter or exit a trade

quickly, but do not guarantee a favorable price. This order should be used when

time is more valuable than price.


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THE FIELD

I.BACKGROUND OF THE INDUSTRY

THE NCDEX PLATFORMNational Commodity and Derivatives Exchange Ltd (NCDEX) is a technology

driven commodity exchange. It is a public limited company registered under the

Companies Act, 1956 with the Registrar of Companies, Maharashtra inMumbai on

April 23, 2003. It has an independent Board ofDirectors and professionals not

having any vested interest in commodity markets. It has been launched to provide a

world-class commodity exchange platform for market participants to trade in awide spectrum of commodity derivatives driven by best global practices,

professionalism and transparency.

NCDEX is regulated by Forward Markets Commission in respect of futures trading

in commodities. Besides, NCDEX is subjected to various laws of the land like the

Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act

and various other legislations, which impinge on its working. It is located in

Mumbai and offers facilities to its members in about 91 cities throughout India at

the moment.NCDEX currently facilitates trading of ten commodities - gold, silver,

soy bean, soy bean oil, rapeseed-mustard seed, expeller rapeseed-mustard seed oil,

and RBD palmolein, crude Palm oil and cotton, Medium and long staple varieties,

At subsequent phases trading in more commodities would be facilitated.


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STRUCTURE OF NCDEX

NCDEX has been formed with the following objectives:

y

To create a world class commodity exchange platform for the marketparticipants.

y To bring professionalism and transparency into commodity trading.

y To inculcate best international practices like de. Modularization, technologyplatforms, low cost

y Solutions and information dissemination without noise etc. into the trade.

y To provide nationwide reach and consistent offering.

y To bring together the entities that the market can trust

PROMOTERS

NCDEX is promoted by a consortium of institutions. These include the ICICI Bank

Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank

for Agriculture and Rural Development (NABARD) and National Stock Exchange

of India Limited (NSE). NCDEX is the only commodity exchange in the country

promoted by national level institutions. This unique parentage enables it to offer a

variety of benefits which are currently in short supply in the commodity markets.

The four institutional promoters of NCDEX are prominent players in their

respective fields and bring with them institution building experience, trust,

nationwide reach, technology and risk management skills.


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GOVERNANCE

NCDEX is run by an independent Board ofDirectors. Promoters do not participate

in the day to day activities of the exchange. The directors are appointed in

accordance with the provisions of the Articles of Association of the company. The

board is responsible for managing and regulating all the operations of the exchange

and commodities transactions. It formulates the rules and regulations related to the

operations of the exchange. Board appoints an executive committee and other

committees for the purpose of managing activities of the exchange.

The executive committee consists of Managing Director of the exchange who

would be acting as the Chief Executive of the exchange, and also other members

appointed by the board.

Apart from the executive committee the board has constitute committee like

Membership committee, Audit Committee, Risk Committee, Nomination

Committee, Compensation Committee and Business Strategy Committee, which,

help the Board in policy formulation.

EXCHANGE MEMBERSHIP

Membership of NCDEX is open to any person, association of persons,

partnerships, cooperative societies, companies etc. that fulfills the eligibility

criteria set by the exchange. All the members of the exchange have to register

themselves with the competent authority before commencing their operations. The

members of NCDEX fall into two categories, trading cum Clearing Members(TCM) and Professional ClearingMembers (PCM)


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TRADING CUM CLEARING MEMBERS (TCMS)

NCDEX invites applications for Trading cum Clearing Members (TCMs) from

persons who fulfill the specified eligibility criteria for trading in commodities. The

TCM membership entitles the members to trade and clear, both for themselves and/

or on behalf of their clients. Applicants accepted for admission as TCM are

required to pay the required fees/ deposits and also maintain net worth as given in

Table

Table Fee/ deposit structure and net worth requirement: TCM

particulars Rupees( in lakh)

Interest free cash security deposit 15.00

Collateral security deposit 15.00

Annual subscription charges 0.50

Advance minimum transaction charges 0.50

Net worth requirement 50.00


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PROFESSIONAL CLEARING MEMBERS (PCM)

NCDEX also invites applications forProfessional ClearingMembership (PCMs)

from persons who fulfill the specified eligibility criteria for trading in

commodities. The PCM membership entitles the members to clear trades executed

through Trading cum ClearingMembers (TCMs), both for themselves and/ or on

behalf of their clients. Applicants accepted for admission as PCMs are required to

pay the following fee/ deposits and also maintain net worth as given in Table

Table 3.2 Fee/ deposit structure and net worth requirement: PCM

particulars Rupees( in lakh)

Interest free cash security deposit 25.00

Collateral security deposit 25.00

Annual subscription charges 1.00

Advance minimum transaction charges 1.00

Net worth requirement 5000.00


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CAPITAL REQUIREMENTS

NCDEX has specified capital requirements for its members. On approval as amember of NCDEX, the member has to deposit Base Minimum Capital (BMC)with the exchange. Base Minimum Capital comprises of the following:

1. Interest free cash security deposit

2. Collateral security deposit

All Members have to comply with the security deposit requirement before theactivation of their trading terminal

Cash: This can be deposited by issuing a cheque/ demand draft payable at

Mumbai in favour of National Commodity & Derivatives Exchange Limited.

Bank guarantee: Bank guarantee in favour of NCDEX as per the specified

format from approved banks. The minimum term of the bank guarantee should be

12 months.

Fixed deposit receipt: Fixed deposit receipts (FDRs) issued by approved banks

are accepted. The FDR should be issued for a minimum period of 36 months from

any of the approved banks.

Government of India securities: National Securities Clearing Corporation

Limited (NSCCL) is the approved custodian for acceptance of Government of

India securities. The securities are valued on a daily basis and a haircut of 25% is

levied.


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Members are required to maintain minimum level of security deposit i.e. Rs.15

Lakh in case ofTCM and Rs.25 Lakh in case ofPCM at any point of time. If the

security deposit falls below the minimum required level, NCDEX may initiatesuitable action including withdrawal of trading facilities as given below:

If the security deposit shortage is equal to or greater than Rs. 5 Lakh, the trading

facility would be withdrawn with immediate effect.

If the security deposit shortage is less than Rs.5 Lakh the member would be

given one calendar weeks' time to replenish the shortages and if the same is not

done within the specified time the trading facility would be withdrawn.

Members who wish to increase their limit can do so by bringing in additional

capital in the form of cash, bank guarantee, fixed deposit receipts or Government

of India securities.

THE NCDEX SYSTEM

As we saw in the first chapter, every market transaction consists of three

components:

Trading

clearing

Settlement

This section provides a brief overview of how transactions happen on the

NCDEX's market.


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TRADING

The trading system on the NCDEX provides a fully automated screen. Based

trading for futures on commodities on a nationwide basis as well as an online

monitoring and surveillance mechanism. It supports an order driven market and

provides complete transparency of trading operations. The trade timings of the

NCDEX are 10.00 a.m. to 4.00 p.m. After hours trading has also been proposed for

implementation at a later stage.

The NCDEX system supports an order driven market, where orders

match automatically. Order matching is essentially on the basis of commodity, its

price, time and quantity. All quantity fields are in units and price in rupees. Theexchange specifies the unit of trading and the delivery unit for futures contracts on

various commodities. The exchange notifies the regular lot size and tick size for

each of the contracts traded from time to time. When any order enters the trading

system, it is an active order. It tries to find a match on the other side of the book. If

it finds a match, a trade is generated. If it does not find a match, the order becomes

passive and gets queued in the respective outstanding order book in the system.

Time stamping is done for each trade and provides the possibility for a complete

audit trail if required.

NCDEX trades commodity futures contracts having one Month, two Month and

three month expiry cycles. All contracts expire on the 20th of the expiry month.

Thus a January expiration contract would expire on the 20th of January and a

February expiry contract would cease trading on the 20th of February. If the 20th

of the expiry month is a trading holiday, the contracts shall expire on the previous

trading day. New contracts will be introduced on the trading day following the

expiry of the near month contract.


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CLEARING

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing of

trades executed on the NCDEX. The settlement guarantee fund is maintained and

managed by NCDEX. Only clearing members including professional clearing

members (PCMs) only are entitled to clear and settle contracts through the clearing

house.

At NCDEX, after the trading hours on the expiry date, based on the available

information, the matching for deliveries takes place firstly, on the basis of

locations and then randomly, keeping in view the factors such as available capacity

of the vault/ warehouse, commodities already deposited and dematerialized andoffered for delivery etc., Matching done by this process is binding on the clearing

members. After completion of the matching process, clearing members are

informed of the deliverable/ receivable positions and the unmatched positions.

Unmatched positions have to be settled in cash. The cash settlement is only for the

incremental gain/ loss as determined on the basis of final settlement price.

SETTLEMENT

Futures contracts have two types of settlements, the MTM settlement which

happens on a continuous basis at the end of each day, and the final settlement

which happens on the last trading day of the futures contract. On the NCDEX,

daily MTM settlement and final MTM settlement in respect of admitted deals in

futures contracts are cash settled by debiting/ crediting the clearing accounts of

CMs with the respective clearing bank. All positions of a CM, either brought

forward, created during the day or closed out during the day, are market to market


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at the daily settlement price or the final settlement price at the close of trading

hours on a day. On the date of expiry, the final settlement price is the spot price on

the expiry day. The Responsibility of settlement is on a trading cum clearing

member for all trades done on his own account and his client's trades. A

professional clearing member is responsible for settling all the participants tradeswhich he has confirmed to the exchange.

On the expiry date of a futures contract, members submit delivery information

through delivery request window on the trader workstations provided by NCDEX

for all open positions for a commodity for all constituents individually. NCDEX on

receipt of such information matches the information and arrives at a delivery

position for a member for a commodity.

The seller intending to make delivery takes the commodities to the designated

warehouse. These commodities have to be assayed by the exchange specified

assayer. The commodities have to meet the contract specifications with allowed

variances. If the commodities meet the specifications, the warehouse accepts them.

Warehouse then ensures that the receipts get updatedin the depository system

giving a credit in the depositor's electronic account. The seller then gives the

invoice to his clearing member, who would courier the same to the buyer's clearing

member. On an appointed date, the buyer goes to the warehouse and takes physical

possession of the commodities.


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COMMODITIES TRADED ON THE NCDEXPLATFORM

In December 2003, the National Commodity and Derivatives Exchange Ltd

(NCDEX) launched futures trading in nine major commodities.

To begin with contracts in gold, silver, cotton, soybean, soya oil, rape/

mustard seed, rapeseed oil, crude palm oil and RBD palmolein are being

offered.

We have a brief look at the various commodities that trade on the NCDEX and

look at some commodity specific issues. The commodity markets can be classified

as markets trading the following types of commodities.

1. Agricultural products

2. Precious metal

3. Other metals4. Energy

AGRICULTURAL COMMODITIES

The NCDEX offers futures trading in the following agricultural commodities.

Refined soy oil, mustard seed, expeller mustard oil, RBD palmolein, crude palm

oil, medium staple cotton and long staple cotton. Of these we study cotton in detail

and have a quick look at the others


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COTTON

Cotton accounts for 75% of the fibre consumption in spinning mills in India and

58% of the total fibre consumption of its textile industry (by volume). At the

average price of Rs.45/ kg, over 17 million bales (average annual consumption, 1bale = 170 kg) of raw cotton trade in the country. The market size of raw cotton in

India is over Rs.130 billion. The average monthly fluctuation in prices of cotton

traded across India has been at around 4.5% during the last three years. The

maximum fluctuation has been as high as 11%. Historically, cotton prices in India

have been fluctuating in the range of 3-6% on a monthly basis.

Cotton is among the most important nonfood crops. It occupies a significant

position, both from agricultural and manufacturing sectors' points of view. It is the

major source of a basic human need, Clothing, apart from other fibred sources like

jute, silk and synthetic. Today, cotton occupies a significant position in the Indian

economy on all fronts as a commodity that forms a means of livelihood to over

millions of cotton cultivating farmers at the primary agricultural sector. It is also a

source of direct employment to over 35 million people in the secondary

manufacturing textile industry that contributes to 14% of the country's industrial

production, 27.30% of the country's export earnings and 4% of its GDP.

CRUDE PALM OIL

Annual edible oil trade in India is worth over Rs.440 billion, with the share of CPO

being nearly 20% (Rs.80-90 billion). The country is over. Dependent on CPO

imports to the extent of over 50% of its annual vegetable oil imports. There is a

close inter linkage between the various vegetable oils produced, traded and


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consumed across the world. The average monthly fluctuation in prices of imported

CPO traded at Kandla (one of the major importing ports in Gujarat) has been at

9.7% during the past two and a half years, the maximum monthly fluctuation being

as high as 25% during the period.

Palm oil is extracted from the mature fresh fruit bunches (FFBs) of oil palm

plantations. One hectare of oil palm yields approximately 20 FFBs, which when

crushed yields 6 tons of oil (including the kernel oil, which is used both for edible

and industrial purposes). Crude palm oil (CPO), crude palmolein, RBD (refined,

bleached, deodorized) palm oil, RBD palmolein and crude palm kernel oil (CPKO)

are the various forms of palm oil traded in the market

RBD PALMOLEIN

The RB

D(refined, bleached and deodorized) palmolein is the derivative of crude

palm oil (CPO), which is obtained from the crushing of Fresh Fruit-bunches

(FFBs) harvested from oil palm plantations. When CPO is subjected to refinement,

RBD palm oil and fatty acids are obtained. Fractionation of RBD palm oil yields

RBD palmolein along with stearin, which is a white solid at room temperature.

While Oil is a stable derivative saturated fat, solid at room temperature), Olein is

relatively unstable (unsaturated fat, liquid at room temperature, but low

cholesterol). The whole quantity of CPO that is produced and used for human

consumption is in the form of RBD palmolein. Cropping of growth patterns of

CPO has been already covered.


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SOY OIL

Soy oil is among the major sources of edible oils in India. Of the annual edible oil

trade worth over Rs.440 billion in the country, soy oils share is over 20.21% at

Rs.90.92 billion in terms of value. Being an agricultural commodity, which is often

subjected to various production and market related uncertainties, soy oil prices

traded across the world are highly volatile in nature.

The average fluctuation in spot prices of refined soy oil traded at Mumbai has been

at 6.6% during the past two and a half years, the maximum monthly fluctuation

being as high as 17% during the period. Historically, soy oil prices in the major

spot markets across the country have been fluctuating in the range of 4.5.8.5%.This offers immense opportunity for the investors to profitably deploy their funds

in this sector apart from those actually associated with the value chain of the

commodity, which could use soy oil futures contract as the most effective hedging

tool to minimize price risk in the market.

Soy oil is the derivative of soybean. On crushing mature beans, 18% oil and

78.80% meal is obtained. While the oil is mainly used for human consumption,

meal serves as the main source of protein in animal feeds. Soy oil is the leading

vegetable oil traded in the international markets, next only to palm. Palm and soy

oils together constitute around 68% of global edible oil export trade volume, with

soy oil constituting 22.85%. It accounts for nearly 25% of the world's total oils and

fats production. Increasing price competitiveness, and aggressive cultivation and

promotion from the major producing nations have given way to widespread soy oil

growth both in terms of production as well as consumption.


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RAPESEED OIL

Rapeseed (also called mustard or canola) oil is the third largest edible oil produced

in the world, after soy and palm oils. On crushing rapeseed, oil and meal are

obtained. The average oil recovery from the seed is about 33%. The remaining is

obtained as oil cake/ meal, which is rich in proteins and is used as an ingredient in

animal feed. Mustard oil, which is known for its pungency, is traditionally the most

favoured oils in the major production tracts world over.

SOYBEAN

The market size of the popularly known miracle bean in India is over Rs.5000

crore. With an annual production of 5.0.5.4 million tons, soybean constitutes

nearly 25% of the country's total oilseed production. The average monthly

fluctuation in prices of soybean traded at one of the active soybean spot market at

Indore (Madhya Pradesh) has been at 10.07% during the past two years, the

maximum monthly fluctuation being as high as 24.30% during the period.

Historically, soybean prices in the major spot markets across the country have been

fluctuating in the range of 5.9%. Soybean is the single largest oilseed produced in

the world. The commodity has been commercially exploited for its utility as edible

oil and animal feed. On crushing mature beans, around 18% oil could be obtained;

the rest being the oil cake/ meal, which forms the primesource of protein in animal

feeds.


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DEMANDThe Consumer demand for gold is more than 3400 tons per year making it

whopping $40 billion worth. More than 80% of the gold consumed is in the form

of jewellery, which is generally predominated by women. The Indian demand to

the tune of 800 tons per year is making it the largest market for gold followed by

USA, Middle East and China. About 80% of the Physical gold is consumed in the

form of jewellery while bars and coins occupy not higher than 10% of the gold

consumed. If we include jewellery ownership, then India is the largest repository

of gold in terms of total gold within the national boundaries.

Regarding pattern of demand, there are no authentic estimates, the available

evidence shows that about 80% is for jewellery fabrication for domestic demand,

and 15% is for investor demand (which is relatively elastic to gold-prices, real

estate prices, financial markets, tax policies, etc.). Barely 5% is for industrial uses.

The demand for gold jewellery is rooted in societal preference for a variety of

reasons. religious, ritualistic, a preferred form of wealth for women, and as a hedge

against inflation. It will be difficult to prioritize them but it may be reasonable to

conclude that it is a combined effect, and to treat any major part as exclusively a

store of value or hedging instrument would be unrealistic. It would not be realistic

to assume that it is only the affluent that creates demand for gold. There is reason

to believe that a part of investment demand for gold assets is out of black money.

Rural India continues to absorb more than 70% of the gold consumed in India and

it has its own role to fuel the barter economy of the agriculture community. The

yellow metal used to play an important role in marriage and religious festivals in

India. In the Hindu, Jain and Sikh community, where women did not inherit landed


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DEMAND

Demand for silver is built on three main pillars; industrial and decorative uses,

photography andjewelry & silverware. Together, these three categories represent

more than 95 percent of annual silver consumption. In recent years, the main world

demand for silver is no longer monetary, but industrial. With the growing use of

silver in photography and electronics, industrial demand for silver accounts for

roughly 85% of the total demand for silver. Jewelry and silverware is the second

largest component, with more demand from the flatware industry than from the

jewelry industry in recent years. India, the largest consumer of silver, is gearing up

to start hallmarking of the white precious metal by April. India annually consumesaround 4,000 tons of silver with the rural areas accounting for the bulk of the sales.

India's demand for silver increased by 177 per cent over the past 10 years as

compared to 517 tons in 1991. According to GFMS, India has emerged as the third

largest industrial user of silver in the world after the US and Japan.

SUPPLY

The supply of silver is based on two facts, mine production and recycled silver

scraps. Mine production is surprisingly the largest component of silver supply. It

normally accounts for a little less than 2/3 rd of the total (last year was slightly

higher at 68%). Fifteen countries produce roughly 94 percent of the worlds silver

from mines. The most notable producers are Mexico, Peru, the United States,

Canada and Australia. Mexico, the largest producer of silver from mines. Peru is

the worlds second largest producer of silver. Silver is often mined as a byproduct

of other base metal operations, which accounts for roughly four-fifths of the mined


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silver supply produced annually. Known reserves, or actual mine capacity, is

evenly split along the lines of production. The mine production is not the sole

source. Others being scrap, disinvestments, government sales and producers

hedging. Scrap is the silver that returns to the market whenrecovered from existing

manufactured goods or waste. Old scrap normally makes up around a fifth ofsupply. Scrap supply increased marginally last year up by 1.2%. The other major

source of silver is from refining, or scraps recycling. Because silver is used in the

photography industry, as well as by the chemical industry, the silver used in

solvents and the like can be removed from the waste and recycled. The United

States recycles the most silver in the world, accounting for roughly 43.6 million

ounces. Japan is the second largest producer of silver from scrap and recycling,

accounting for roughly 27.8 million troy ounces in 1997. In the United States and

Japan, three-quarters of all the recycled silver comes from the photographic scrap,

mainly in the form of spent fixer solutions and old X-ray films.

THE STUDY

I.OBJ

ECTIVES OF TH

E STUDY

PRIMARY OBJECTIVE

1) To understand realistically the pattern of fluctuations of price indices

of two agricultural commodities and the factors behind that

SECONDARY OBJECTIVE


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2) To study the operation of commodity trading in india and assess

its importance

3) To provide a trend analysis of the current MCX & NCDEX indices

II.

SCOPE OF THE STUDY

Organized commodity derivatives in India started as early as 1875, barely about a decade after

they started in Chicago. However, many feared that derivatives fuelled unnecessary speculation

and were detrimental to the healthy functioning of the markets for the underlying commodities.

As a result, after independence, commodity options trading and cash settlement of commodity

futures were banned in 1952. A further blow came in 1960s when, following several years of

severe draughts that forced many farmers to default on forward contracts (and even caused some

suicides), forward trading was banned in many commodities considered primary or essential.

Consequently, the commodities derivative markets dismantled and remained dormant for about

four decades until the new millennium when the Government, in a complete change in policy,

started actively encouraging the commodity derivatives market. Since 2002, the commodities

futures market in India has experienced an unprecedented boom in terms of the number of

modern exchanges, number of commodities allowed for derivatives trading as well as the value

of futures trading in commodities, which might cross the $ 1 Trillion mark in 2006.

H

owever, there are several impediments to be overcome and issues to be decided for sustainabledevelopment of the market. This paper attempts to answer questions such as:

How do price indices fluctuate so easily and how to understand them?

Is this progress sustainable and what are the obstacles that need urgent attention if the

market is to realize its full potential?

Why are commodity derivatives important and what could other emerging economies

learn from the Indian mistakes and experience?

III. RESEARCH METHODOLOGY


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DEFINITION

Research is an organized, systematic, data-based, critical, scientific inquiry into a specific

problem that needs a solution. Scientific research has the goal of solving problems and

establishing a step-by-step logical, organized, and rigorous method to identify problems, gathers

data, analyses the data, and draw valid conclusions there from.

1. TYPE OF RESEARCH USED

The research undertaken in this problem is descriptive in nature. Descriptive study attempts to

obtain a complete and accurate descriptive of situation, formal design is required to ensure that

the description covers all phases desired. Precise statement at problem indicates what than bedesigned provides for collection of this information under the study.

2. NEED OF THE STUDY

The empirical analysis shows that cycles in economic activity are major

determinants of the short-run behavior of shipping freight rates in the year 1850

and World War I. Consistent with the economic theory, there is a striking

asymmetry between the peaks and troughs of shipping cycles. However, there is

a close timing relationship between the upper turning points of the business

cycle, commodity prices and freight rates which is particularly shown in the

peak years 1875,1889,1900,1912. So this study on commo dit y in dic es and

pr ic es, to an extent would no t only help us in understandin g the economy o f the

country, the growth driving commodities favoring EXIM trade but also for

bet ter understand in g the fr eig ht market changes and be havio r fo r the fu ture.


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3. SOURCES OF DATA

The data was collected through

1. Secondary data.

SECONDARY DATA

Company records, magazines, journals and websites were made use to collect secondary data

regarding indices, operations of commodity market and growth patterns

A) STATISTICAL TOOLS:

The statistical tools that were used for the study is as follows:

1. Weighted Average and

2. Technical analysis

WEIGHTED AVERAGE:

The weighted average stands for the relative importance of the different items. The formula for

comparing weighted mean is

XW =? Xw/w

X is the variables values i.e., X1, X2..Xn.

W represents the weights attached to values.

TECHNICAL ANALYSIS:


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3) To understand realistically the pattern of f luctuations of price

indices of two agricultural commodities and the factors behind that

SUGAR

A sweet white (or brownish yellow) crystalline substance, of a sandy or granular consistency,

obtained by crystallizing the evaporated juice of certain plants, as the sugar cane, sorghum, beet

root, sugar maple, etc. It is used for seasoning and preserving many kinds of food and drink.

Ordinary sugar is essentially sucrose.

Varieties of Sugar

y White, refined sugar

y Caster sugar

y Icing sugar

y Icing mixture

y Brown sugar

y Dark brown sugar

y Raw sugar

y Golden demerara

y Golden syrup

y Treacle

y Molasses

y Caramel

Decoration and specialty sugars

Majority of the sugarcane produced in India is of the following hybrid varieties: S Sinense, S.

Barberi, CO-213, CO 223, CO 312, CO 313, CO 419, CO 1148, CO 740 and COS 767

Sugar producing areas in India

In India the major sugar cane producing areas are Andhra Pradesh, Assam, Bihar, Gujarat,


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FACTORS INFLUENCING SUGAR MARKETS

y Price

y Refinery activity

yConsumer income

y Candy and confectionery sales

y Changing eating habits

y Sugars use in new technologies, such as ethanol production for automobile fuel.

IMPORTANT WORLD SUGAR MARKETS

y Brazil

0

5000

10000

15000

20000

25000

jan'06 july'06 Jan'07 july'07 jan'08 july'08 jan'09

sugar priceinrupees / metrictons

sugar price inrupees / metric

tons


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y Australia

y U.S

y Cuba

y Philippines

y China

y Bangladesh

y Iran

INTERNATIONAL TRADE

Over the past fifty years, especially, the international trade in sugar has changed dramatically.

Since it is either imported or exported by every country on earth, sugar has become an integral

component of the economic relationships among nations. Because of that unique position, the

trade in sugar has both reflected-and been affected by-a wide range of divergent forces, including

global politics, health consciousness, the emergence of developing nations as suppliers and

consumers, and many others.

Perhaps the greatest change in the international sugar trade has been the trend toward price

stabilization. Historically at the mercy of everything from war to weather, the price of sugar has

always been extremely volatile. The International SugarTrade contains the most essential and

up-to-date information currently available. It includes numerous tables and graphs describing

production, consumption, and trade for nearly every country.


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SUGAR PRICES 2005

S cents / Kg


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SUGAR PRICES 2006

Technical analysis

Jan- Mar:

Breakaway Gaps

Occur when prices gap higher or lower out of a congestion pattern in the direction of the

prevailing trend

Apr Jun:

Measuring or Running Gaps

Difficult to identify, but usually occur at the midpoint in a price rally or decline.

July Sep

Falling or Declining

This formation occurs when the slope of price bar highs and lows join at a point forming

an declining wedge. The slope of both lines is down with the upper line being steeper

than the lower one. To trade this formation, place an order on a break up and out of the

wedge or a sell order on a break down and out the wedge. Falling wedges, with a prior

uptrend, are anticipated to break up and out, rather than down and out


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Oct Dec

Triple Bottom

Anticipates a change in trend from down to up.

SUGAR PRICES 2007

Jan- Mar:

Declining

The declining channel is a formation with parallel price barriers along both the price

ceiling and floor. Unlike the sideways channel the declining channel has a decrease in

both the price ceiling and price floor.

Apr Jun:

Ascending Triangle

A formation in which the slope of price highs and lows come together at a point outlining

the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be

sloping from lower to higher and from left to right. To trade this formation, place a buy

order on a break up and out of the triangle or a sell order on a break down and out of

the triangle. Ascending triangles, with a prior downtrend, are anticipated to break

down and out, rather than up and out.


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July Sep

Pennants

Similar to a Symmetrical Triangle but generally stubbier or not as elongated.A formation

in which the slope of price bar highs and lows are converging to a point so as to outline

the pattern in a symmetrical triangle. To trade this formation, you can place orders at

both the break up and out of the pennant and break

down and out of the pennant.

Oct Dec

Triple Bottom

Anticipates a change in trend from down to up

SUGAR PRICES 2008

Jan- Mar:




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WHEAT

Wheat is a cereal grain that belongs to the grass family of the genus Triticum. A dry, one

seeded fruit named kernel is obtained from this spiky grass like grain, which is ground to make

flour and is consumed throughout the world as one of the most important staple food. It is the

second largest cereal grain consumed on earth and that is why it is widely cultivated in more than

30000 varieties.

Wheat is important especially for making breads and other bakery products as it has got the

maximum number of glutens as compared to any other grain. This crop is also grown as a forage

crop for the livestock

Overview

Wheat is a very important edible cereal grain crop. As already mentioned, it is the second largest

grain crop consumed after rice. The cultivation of wheat has its own advantages like it has a very

good yield per unit area, has a relatively short growing duration period and the production of

wheat is comparatively easier than the other grain crops as it grows well in the temperate

regions. That is why it serves as a very good cash crop and proves its dominance in the world

commerce. Gluten, which is a primary constituent in raised bread, is found in wheat and that is

why most of the bakery products are made from wheat only.

The world production of wheat figures over 585 million tons annually. The largest producer of

wheat in the world is the European Union followed by China, India and United States of

America. The total wheat production of the world is slightly concentrated is clear from the fact

that these four producers contribute to around 60% of the total production. The consumption of

wheat in the world is a huge 580 million tons but is successfully kept satisfied with an equally

high production figures. Consumption has been constantly increasing during the last 10 years

with the increase in population, and alarmingly, the consumption is prepared to shoot up further

and is expected to reach up to 775 million tons in 2020. Wheat is consumed all through the globe

and the leading countries in this list are European Union, China


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y India

y Russia

y United States of America

y Pakistan

The above list makes it clear that the largest producers of wheat in the world are also the largest

consumers of the world, which means, most of the wheat production is consumed at the place of

production. The export market of wheat is getting competitive with the new entrants like India

into it and the export figures hover around 200 million tons. The major exporting countries of

this crop are: -

y United States of America

y Australia

y Canada

y European Union

y Argentina

The imports of wheat are done by the countries, which have a high domestic demand and a

fluctuating production level. That is why the countries shuffle in the list of highest wheat

importing countries. The world import figures sum up to 100 million tons and are currently done

by more than 100 countries. The major countries are

y European Union

y China

y Egypt

y Japan

y Brazil

y Mexico

y Indonesia

y Algeria

y Philippines

y Iraq


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The largest producer of wheat in the world is European Union that contributes to around 1/4th

share to the worlds total production. As it is said that the demand of wheat increases with the

increase in population, the nations having the largest population in the world i.e. China and India

stand at the 2nd and 3rd position in the largest wheat producing nations list in order to satisfy

the domestic consumption demand. These two countries contribute 14 % and 12% respectively in

the worlds total production. India has shown a high rise in production of wheat after the green

revolution and taken a lead from USA in recent times.

Wheat is produced on approximately 2.5 million square kilometers of the world. The maximum

area in the total cultivated area of wheat is constituted by India at around 13%. The other major

countries that have a significant impact on the total area contributed for wheat production are

y European Union

y Russia

y China

y USA

y Australia

y Canada

y Kazakhstan

Production of wheat in India

The following areas in India are the major wheat producing areas in the country and contribute to

around 92% of the total production in the country

y UttarPradesh

y Haryana

y Punjab

y Rajasthan

y Madhya Pradesh

y Gujarat

y Bihar


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India produces around 75 million tons of wheat every year and stands at the third position in the

list of the major wheat producers in the world. India also stands at the top in the world in terms

of area covered in production of wheat. UttarPradesh is the leading producer state in India

followed by Punjab and Haryana. Wheat occupies a major share of 35% production in the total

production of crops cultivated and 65% of total cropped area in the country. This share in

production and area covered of the crop has increased since independence and is also constantly

rising. The yield of wheat in kilograms per hectare has also risen significantly from 522 kg/ha in

1950/51 to 1620kg/ha in 1998/99

Indian wheat market

India is the third largest producer of the wheat crop. It has been successfully fulfilling its large

domestic consumption demand in the past few years and has been exporting the surpluses to give

the major exporters of the world a good competition. India produces an average of 75 million

tons wheat each year but the production of this crop is generally fluctuating due to the

uncertainty of the rainfall. The state of UttarPradesh leads the production in the country. For

self-consumption purposes, the farmers retain around 48% of their production and hence it is not

entered into the total production figures of the country.

Indian wheat is generally medium hard bread wheat. It is a staple food of this country. That is

why almost all of the wheat produced is consumed. India holds the third position in the major

wheat consumers list after European Union and China consuming around 72 million tons of

wheat. The demand-supply flows with in the country are largely interfered by the government of

the country so as to make sure that the grain supplies be stable and prices do not get affected.

With the introduction of the new technologies in the agricultural sector, there has been a constant

increase in the productivity of wheat produced and hence there has been a growth in the surplus

level of the country and consequently a rising trend in the wheat export. World market sees a

dependable supplier of wheat in the form of India.T

he major exporters of the world namely USand Australia have lost their share in the worlds export with the coming of India in the exporting

scenario. The export figures of India in 2003-04 were 5 million tons.


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WHEAT PRICES 2007

Technical analysis

Jan- Mar:

Horizontal or Sideways

A horizontal or sideways is a formation that features both resistance and support.

Support forms the low price bar, while resistance provides the price ceiling

Apr Jun:

Resistance

A horizontal ceiling where the pressure to sell is greater than the pressure to buy.

Therefore, an increase in price is reversed and prices revert downward. Typically

resistance can be located on a chart by a previous set of high


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July Sep

Non-Symmetrical

A formation in which the slope of price highs and lows are converging to a point so as to

outline the pattern in a non- symmetrical triangle.T

o trade this formation, place a buy order on abreak up and out of the triangle or a sell order on a break down and out of the triangle

Oct Dec

Ascending Triangle


the pattern of a Right Triangle. The hypotenuse in an Ascending Triangle should be

sloping from lower to higher and from left to right. To trade this formation, place a buy

order on a break up and out of the triangle or a sell order on a break down and out of

the triangle. Ascending triangles, with a prior downtrend, are anticipated to break

down and out, rather than up and out.

WHEAT PRICES 2008


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Technical analysis

Jan- Mar:

Rising or Inclining

This formation occurs when the slope of price bar highs and lows join at a point forming

an inclining wedge. The slope of both lines is up with the lower line being steeper than

the higher one. To trade this formation, place an order on a break up and out of the

wedge or a sell order on a break down and out the wedge. Rising wedges, with a prior

downtrend are anticipated to break down and out, rather than up and out

Apr Jun:

Symmetrical

A formation in which the slope of price highs and lows are converging to a point so as to

outline the pattern in a symmetrical triangle. To trade this formation place a buy order

on a break up and out of the triangle or a sell order on a break down and out of the

triangle.

July Sep

Pennants

Similar to a Symmetrical Triangle but generally stubbier or not as elongated.A formation

in which the slope of price bar highs and lows are converging to a point so as to outline

the pattern in a symmetrical triangle. To trade this formation, you can place orders at

both the break up and out of the pennant and break down and out of the pennant.

Oct Dec


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Bull Flag

A formation consisting of a small number of price bars where the slope of price bar

highs and lows are parallel and declining. Bull Flags are identified by their characteristic

pattern and by the context of the prior trend. In the case of a Bull Flag the trend leading

to the formation of the Bull Flag is up. To trade this formation, place orders on the break

up and break down points, leaving your unfilled order as your stop loss

WHEAT PRICES 2009

Technical analysis

Jan- Mar:

1-2-3 (A-B-C) Bottom

Anticipates a change in trend from down to up on a break above the

number2 point


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Apr Jun:



July Sep

Descending Triangle


the pattern of a Right Triangle. The hypotenuse in an Descending Triangle should be

sloping from higher to lower and left to right. To trade this formation, place a buy order

on a break up and out of the triangle or a sell order on a break down and out of the

triangle. Descending triangles, with a prior uptrend, are anticipated to break up and out,

rather than down and out

Oct Dec

Triple Top

Anticipates a change in trend from up to down

WHEAT PRICES 2010


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Jan- Apr:

1-2-3 (A-B-C) Top

Anticipates a change in trend from up to down on a break below the number2 point.

Global Scenario

y The world wheat production in the recent years has been observed to be hoveringbetween 560-580 million tons a year.

y The biggest cultivators of wheat are EU-25, China, India, America, Russia, Australia,Canada, Pakistan, Turkey and Argentina. India, EU-25, China, India and US, the fourlargest producers account for around 58% of the total global production.

y World wheat consumption is consistently growing with growth in population, as it is oneof the major staple foods across the world. The major consuming countries of wheat areEU, China, India, Russia, USA and Pakistan.

y Around 16-19% of the world wheat production is traded annually between countries. Theannual world trade in wheat is to the extent of 102-106 million tons. America, Australia,Canada, EU-25 and Argentina are the five largest exporters of wheat in the world.

y Major importing countries that tops in the figures are European Union, China, Egypt,Japan, Brazil and European Union. Other importing nations areMexico, Indonesia,Algeria, Philippines, and Iraq. However the import amount varies year to year dependingupon the domestic production.

CONCLUSION

India has the largest area in the world under wheat. However, in terms of production, we

are only the third largest behind EU-25 and China. India produces about 65-75 milliontons of wheat a year, which is about 35% of India's total food grain production of 210-

212 million tons. Since wheat and rice are grown in separate seasons, they do not

compete for area. The major wheat producing states of India are UttarPradesh, Punjab,

Haryana, Madhya Pradesh, Rajasthan and Bihar. Which together account for around 93%


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of total production. Wheat is sown during November to January and harvested during

March to April. The wheat-marketing season in India is assumed to begin from April

every year.

Indian wheat is largely soft/medium hard, medium protein, bread wheat. India also

produces around 1.5 million tons of durum wheat, mostly in central and western India,which is not segregated and marketed separately .Government, announces Minimum

Support Prices (MSP), which is the minimum price at which procurement has to be

carried. The total procurement of wheat by Government agencies ranges from 8 to 20

million tons, accounting for only 15-20% of the total production. The support price

operation and the Public Distribution Systems (PDS) play a significant role in

maintaining reasonable and stable food grain prices in the country for both the producers

and consumers. India consumes around 70-72 million tons of wheat a year. Most

domestic wheat consumption is in the form of homemade chapatti or rotis using custom

milled Atta, although usage of branded packaged atta marketed by large companies is

increasing in cities. There are around 200 large flourmills in India, with a milling

capacity of around 15 million tons.

India exported around 7 million tons subsidized by Govt in 2007-08, as a result of surplus

stock. However, current Govt. policies are not in favour of exports. Southeast Asia and

Gulf countries are major importers of Indian wheat.

2) To study the operation of commodity trading in india and assess its

importance

Introduction

The Indian economy is witnessing a mini revolution in commodity derivatives and risk

management. Commodity options trading and cash settlement of commodity futures had been

banned since 1952 and until 2002 commodity derivatives market was virtually non-existent,


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provides regulatory oversight under the powers delegated to it by the central Government, and

(iii) the Central Government - Department of Consumer Affairs, Ministry of Consumer Affairs,

Food and Public Distribution - is the ultimate regulatory authority.

The already shaken commodity derivatives market got a crushing blow

when in 1960s, following several years of severe draughts that forced many farmers to default on

forward contracts (and even caused some suicides), forward trading was banned in many

commodities considered primary or essential. As a result, commodities derivative markets

dismantled and went underground where to some extent they continued as OTC contracts at

negligible volumes. Much later, in 1970s and 1980s the Government relaxed forward trading

rules for some commodities, but the market could never regain the lost volumes.

Change in Government Policy

After the Indian economy embarked upon the process of liberalization and globalization in 1990,

the Government set up a Committee in 1993 to examine the role of futures trading. The

Committee (headed by Prof. K.N. Kabra) recommended allowing futures trading in 17

commodity groups. It also recommended strengthening of the Forward Markets Commission,

and certain amendments to Forward Contracts (Regulation) Act 1952, particularly allowing

options trading in goods and registration of brokers with Forward Markets Commission. The

Government accepted most of these recommendations and futures trading were permitted in allrecommended commodities.

Commodity futures trading in India remained in a state of hibernation for nearly four decades,

mainly due to doubts about the benefits of derivatives. Finally a realization that derivatives do

perform a role in risk management led the government to change its stance. The policy changes

favoring commodity derivatives were also facilitated by the enhanced role assigned to free

market forces under the new liberalization policy of the Government. Indeed, it was a timely


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decision too, since internationally the commodity cycle is on the upswing and the next decade is

being touted as the decade of commodities.

Why are Commodity Derivatives Required?

India is among the top-5 producers of most of the commodities, in addition to being a major

consumer of bullion and energy products. Agriculture contributes about 22% to the GDP of the

Indian economy. It employees around 57% of the labor force on a total of 163 million hectares of

land. Agriculture sector is an important factor in achieving a GDP growth of 8-10%. All this

indicates that India can be promoted as a major center for trading of commodity derivatives.

It is unfortunate that the policies of FMC during the most of 1950s to 1980s suppressed the very

markets it was supposed to encourage and nurture to grow with times. It was a mistake other

emerging economies of the world would want to avoid. However, it is not in India alone that

derivatives were suspected of creating too much speculation that would be to the detriment of the

healthy growth of the markets and the farmers. Such suspicions might normally arise due to a

misunderstanding of the characteristics and role of derivative product.

It is important to understand why commodity derivatives are required and the role they can play

in risk management. It is common knowledge that prices of commodities, metals, shares and

currencies fluctuate over time. The possibility of adverse price changes in future creates risk for

businesses. Derivatives are used to reduce or eliminate price risk arising from unforeseen price

changes. A derivative is a financial contract whose price depends on, or is derived from, the

price of another asset.

Two important derivatives are futures and options.

(i) Commodity Futures Contracts: A futures contract is an agreement for buying or selling acommodity for a predetermined delivery price at a specific future time. Futures are standardized

contracts that are traded on organized futures exchanges that ensure performance of the contracts

and thus remove the default risk. The commodity futures have existed since the Chicago Board


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of Trade (CBOT, www.cbot.com) was established in 1848 to bring farmers and merchants

together. The major function of futures markets is to transfer price risk from hedgers to

speculators. For example, suppose a farmer is expecting his crop of wheat to be ready in two

months time, but is worried that the price of wheat may decline in this period. In order to

minimize his risk, he can enter into a futures contract to sell his crop in two months time at a

price determined now. This way he is able to hedge his risk arising from a possible adverse

change in the price of his commodity.

(ii) Commodity Options contracts: Like futures, options are also financial instruments usedfor hedging and speculation. The commodity option holder has the right, but not the obligation,

to buy (or sell) a specific quantity of a commodity at a specified price on or before a specified

date. Option contracts involve two parties the seller of the option writes the option in favour of

the buyer (holder) who pays a certain premium to the seller as a price for the option.T

here aretwo types of commodity options: a call option gives the holder a right to buy a commodity at an

agreed price, while a put option gives the holder a right to sell a commodity at an agreed price

on or before a specified date (called expiry date).

The option holder will exercise the option only if it is beneficial to him; otherwise he will let the

option lapse. For example, suppose a farmer buys a put option to sell 100 Quintals of wheat at a

price of $25 per quintal and pays a premium of $0.5 per quintal (or a total of $50). If the price

of wheat declines to say $20 before expiry, the farmer will exercise his option and sell his wheat

at the agreed price of $25 per quintal. However, if the market price of wheat increases to say $30

per quintal, it would be advantageous for the farmer to sell it directly in the open market at the

spot price, rather than exercise his option to sell at $25 per quintal.

Futures and options trading therefore helps in hedging the price risk and also provide investment

opportunity to speculators who are willing to assume risk for a possible return. Further, futurestrading and the ensuing discovery of price can help farmers in deciding which crops to grow.

They can also help in building a competitive edge and enable businesses to smoothen their

earnings because non-hedging of the risk would increase the volatility of their quarterly earnings.

Thus futures and options markets perform important functions that can not be ignored in modern


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business environment. At the same time, it is true that too much speculative activity in essential

commodities would destabilize the markets and therefore, these markets are normally regulated

as per the laws of the country.

Modern Commodity Exchanges

To make up for the loss of growth and development during the four decades of restrictive

government policies, FMC and the Government encouraged setting up of the commodity

exchanges using the most modern systems and practices in the world. Some of the main

regulatory measures imposed by the FMC include daily mark to market system of margins,

creation of trade guarantee fund, back-office computerization for the existing single commodity

Exchanges, online trading for the new Exchanges, demutualization for the new Exchanges, and

one-third representation of independent Directors on the Boards of existing Exchanges etc.

Responding positively to the favourable policy changes, several Nation-wideMulti-Commodity

Exchanges (NMCE) have been set up since 2002, using modern practices such as electronic

trading and clearing. Selected Information about the two most important commodity exchanges

in India [Multi-Commodity Exchange of India Limited (MCX), and National Multi-Commodity

& Derivatives Exchange of India Limited (NCDEX)] is given in Exhibit-1 and Exhibit-2.

MULTI-COMMODITY EXCHANGE OF INDIA LIMITED

(MCX)MCX an independent and de-mutualized multi commodity exchange has permanent recognition

from Government of India for facilitating online trading, clearing and settlement operations for

commodity futures markets across the country. Key shareholders ofMCX are Financial

Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of


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(PNB), CRISILLimited (formerly the Credit Rating Information Services of India Limited),

Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the

equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the

only commodity exchange in the country promoted by national level institutions. This unique

parentage enables it to offer a bouquet of benefits, which are currently in short supply in the

commodity markets. The institutional promoters of NCDEX are prominent players in their

respective fields and bring with them institutional building experience, trust, nationwide reach,

technology and risk management skills

.

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act,

1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has

commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven

de-mutualized on-line commodity exchange with an independent Board ofD

irectors andprofessionals not having any vested interest in commodity markets. It is committed to provide a

world-class commodity exchange platform for market participants to trade in a wide spectrum of

commodity derivatives driven by best global practices, professionalism and transparency.

NCDEX is regulated by Forward Market Commission in respect of futures trading in

commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act,

Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations,

which impinge on its working

.

NCDEX is located in Mumbai and offers facilities to its members in more than 390 centers

throughout India. The reach will gradually be expanded to more centers. NCDEX currently

facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee,

Cotton, Cotton Seed Oilcake, Crude Palm Oil, ExpellerMustard Oil, Gold, Guar gum, Guar

Seeds, Gur, Jeera, Jute sacking bags,Mild Steel Ingot, Mulberry Green Cocoons, Pepper,

Rapeseed - Mustard Seed ,Raw Jute, RBDPalmolein, Refined Soy Oil, Rice, Rubber, Sesame

Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (BlackMatpe), Wheat, Yellow Peas,

Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities

would be facilitated.


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Booming Business: US$ 1 Trillion and Beyond

Since 2002 when the first national level commodity derivatives exchange started, the exchanges

have conducted brisk business in commodities futures trading. In the last three years, there has

been a great revival of the commodities futures trading in India, both in terms of the number of

commodities allowed for futures trading as well as the value of trading. While in year 2000,

futures trading were allowed in only 8 commodities, the number jumped to 80 commodities in

June 2004. The value of trading in local currency saw a quantum jump from about INR 350

billion in 2001-02 to INR 1.3 Trillion in 2003-04. The data in Exhibit-3 indicates that the value

of commodity derivatives in India could cross the US$ 1 Trillion mark in 2006. The market

regulator Forward Markets Commission (FMC) disseminates fortnightly trading data for each of

the 3 national & 21 regional exchanges that have been set up in recent years to carry on the

futures trading in commodities in the country. Exhibit-3 presents comparative trading data for

three fortnightly periods inMarch, June and September 2008 and brings up some interesting

facts.

Sr. no Name of the exchange 16 Mar 08

to 31 Mar 0816 Jun 08

to 30 Jun 0816 Sep 08

to 30 Sep 08

1 Multi-Commodity Exchange of

India Limited, Mumbai

$m4,603.69 $m5123.76 $m11,042.25

2 NationalMulti-CommodityExchange of India Limited,

$m235.74 $m143.34 $m 106.85


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y Gold - 4,082.15

y Silver - 3,869.36

y Crude oil - l3, 380.13

y Chana (chick peas) - 2,100.15

y Urad (BlackLegume) - 624.71

y Soy oil - 478.28

y Gur (Jaggery: cane sugar) - 369.72

y Guar Gum - 345.08

y Tur (Lentils) - 329.35

UNRESOLVED ISSUES AND FUTURE PROSPECTS

Even though the commodity derivatives market has made good progress in the last few years, the

real issues facing the future of the market have not been resolved. Agreed, the number of

commodities allowed for derivative trading have increased, the volume and the value of business

has zoomed, but the objectives of setting up commodity derivative exchanges may not be

achieved and the growth rates witnessed may not be sustainable unless these real issues are

sorted out as soon as possible. Some of the main unresolved issues are discussed below.

a. Commodity Options: Trading in commodity options contracts has been banned since 1952.

The market for commodity derivatives cannot be called complete without the presence of this

Important derivative. Both futures and options are necessary for the healthy growth of the

market.

While futures contracts help a participant (say a farmer) to hedge against downside price

movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is

an immediate need to bring about the necessary legal and regulatory changes to introduce

commodity options trading in the country. The matter is said to be under the active consideration

of the Government and the options trading may be introduced in the near future.

b. The Warehousing and Standardization: For commodity derivatives market to work

efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient

warehousing system in the country. The Habibullah (2003) task force admitted, A sophisticated


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warehousing industry has yet to come about. Further, independent labs or quality testing centers

should be set up in each region to certify the quality, grade and quantity of commodities so that

they are appropriately standardized and there are no shocks waiting for the ultimate buyer who

takes the physical delivery. Warehouses also need to be conveniently located.

Central Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses

across the country with a storage capacity of 10.4 million tons. This is obviously not adequate for

a vast country. To resolve the problem, a GraminBhandaranYojana (Rural Warehousing Plan)

has been introduced to construct new and expand the existing rural godowns. Large scale

privatization of state warehouses is also being examined.

c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present

warehousing system that only about 1% to 5% of the total commodity derivatives trades in the

country are settled in physical delivery.T

herefore the warehousing problem obviously has to behandled on a war footing, as a good delivery system is the backbone of any commodity trade. A

particularly difficult problem in cash settlement of commodity derivative contracts is that at

present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding

contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should

be settled in physical delivery. To avoid this, participants square off their positions before

maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need

to modify the law to bring it closer to the widespread practice and save the participants from

unnecessary hassles.

d. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely

need a strong and independent regular; similar to the Securities and Exchange Board of India

(SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the

Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry

of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative

that the Government should grant more powers to the FMC to ensure an orderly development of

the commodity markets. The SEBI and FMC also need to work closely with each other due to the

inter-relationship between the two markets.

e.Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity

exchanges. Though over 80 commodities are allowed for derivatives trading, in practice


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Charts:

y www.barcharts.com

y www.chartsrus.com

y www.mongabay.com

y www.djindexes.com

y Dow Jones Industrial Average Historical Prices / Charts

Trend and other information:

y www.crnindia.com

y www.indiamart.com

y www.ncdex.com

y www.fmc.gov.in

BOOKS

y Futures, options and swaps by Robert W. Kolb.

y Derivative markets in India 2003 edited by Susan Thomas.

y Options, futures and other derivatives by John Hull.

y Thomas Susan (2003): Agricultural Commodity Markets in India; Policy Issues for

Growth,Indira Gandhi Institute forDevelopment Research, Mumbai.


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33312110 a Project on Commodity Trading

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Transcript of 33312110 a Project on Commodity Trading